Definition
ABS are structured similarly to MBS but backed by non-mortgage loans. Common collateral includes auto loans, credit card receivables, student loans, and equipment leases. ABS are typically tranched into senior (AAA-rated) and subordinated (lower-rated) classes, with losses absorbed by junior tranches first to protect senior investors.
lightbulb Example
An auto loan ABS is structured into senior (85%, AAA-rated, 4.5% yield) and subordinated (15%, BBB-rated, 6.5% yield) tranches. The first 15% of losses are absorbed by the subordinated tranche before the senior tranche is affected.
verified_user Key Points
- Backed by non-mortgage consumer or commercial loans
- Tranching creates different risk/return profiles
- Senior tranches protected by subordination
- Collateral quality is the key credit driver